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Consequences for the International Economic System

Lawrence Chimerine, Economic Strategy Institute

I agree with the observations that James Fallows made about East Asia and, quite frankly, about economic thinking in the United States and its slowness in adapting to what is happening in the real world on trade issues. That is my subject this morning—to give you some perspective of what is happening with respect to U.S. trade and to put that in the context of overall U.S. economic performance and, in fact, overall global performance.

A record deficit:
All of you know the numbers or have read about them. We set a new record last year in the United States for the merchandise trade deficit, and based on data for the first two months of this year, it looks as if 1995 will be another record year for the U.S. merchandise trade deficit. However, there seems to be some complacency about this. Many people, particularly many people in my own profession, are not really overly concerned about it, in part because the economy seems to be doing well anyway, although I believe that is temporary. But more than that, we are told frequently that it is really a sign of strength.

Savings and exchange rates:
Some economists claim that the reason our trade deficit is so high is because our economy is growing rapidly and we are drawing in imports, and so that the deficit is a macroeconomic problem. In addition, they argue that we do not save enough, and the Japanese save a lot. We are told that we are always going to have a huge trade deficit until we raise our savings or until everybody else cuts their savings. We have also been told that exchange rates will solve the problem. The dollar will get weaker and weaker until the trade deficit declines. Of course, we only have about 80 yen to go.

We started at 360 yen to the dollar. I am not sure how anyone can keep making that argument, but, nonetheless, you keep reading it. And the final argument of the "not to worry crowd" is, it is okay that we have a $180 or $190 billion merchandise trade deficit, we will make it up in services because we do have competitive advantages in a number of service industries. Services will bail us out.

Structural issues:
All of these arguments in my judgment are either completely inaccurate or highly misleading. They focus excessively on the macroeconomic dimension of our trade deficit, in which it has become increasingly apparent that a large fraction of our trade imbalance is what I call structural, unrelated to macroeconomic trends.

Let me give you some of the broad arguments in support of this assertion, and then we will go on to some of the other issues.

First, the argument is that the United States is growing rapidly, thereby pulling in imports. Look at the numbers. In the last five or six years, real imports coming into the United States have risen at a rate more than four times faster than GNP growth. Imports are income elastic, that is, historically, they have grown more rapidly than GNP. Historically the elasticity has been in the range of two. So in the last four years, the rate of import growth relative to the rate of GNP growth has more than doubled from the already high ratio that existed previously. So import growth has dramatically accelerated.

Second, on the export side, while our exports have grown at a healthy rate over the last several years, most studies would suggest that our exports should have been rising even faster than they have been rising, in view of the improvement in U.S. competitiveness, particularly price competitiveness resulting from a significant decline in the dollar.

So although macroeconomics may be a part of the problem, it is clear that it is not the full explanation of why our trade imbalance has been growing so rapidly. And, in fact, look back three or four years ago. The United States was in the middle of a prolonged period of recession and stagnation that lasted four or five years. Western Europe and Japan—this is before the Japanese recession or stagnation developed—were growing rapidly and we still had a $90-$100 billion a year trade deficit.

So, even under ideal, relative economic growth patterns, we still had large deficits. The truth is that we have had a huge and persistent trade deficit in the United States for more than 15 years, regardless of the trends in underlying economic growth.

Third, my favorite argument is the saving and investment argument. I do not know how many of you remember your elementary economics. If you do, you know that there is a well-known identity that the difference between saving and investment equals the trade deficit, or the current account deficit. I will call it the trade deficit for simplicity.

Unfortunately, a lot of economists have naturally assumed that the causality goes completely from savings to trade. Identities tell you nothing about the direction of causality, but if you have a structural trade deficit caused by closed markets overseas or foreign predatory trade practices, or other factors, it is ultimately going to depress savings in your country and probably raise savings in those countries that have adopted such measures.

For example, suppose this were to happen in the United States. Suppose our trade deficit rose because of an increase in import penetration caused by any number of factors—some new foreign products are of better quality, exchange rates change, etc. Obviously this would displace some domestic production that in turn would reduce jobs and income, which is likely to lower savings, and reduce tax receipts, both of which would contribute to a decline in net national savings.

The causality, to some extent, goes in the other direction in Japan as well. Prices in the Japanese market are extremely high. Is it not reasonable that those high prices to some extent discourage consumption, push up savings, particularly for items you must save for if you want to afford them in the future such as housing and autos?

The Japanese are thrift oriented, and they have a number of tax policies and other policies designed to encourage savings. But to some extent, the high saving rate does reflect the high cost of living in Japan, reflecting in my opinion the absence of import competition, which enables prices to remain at those high levels in essentially what is a sanctuary market.

So the saving and investment argument does not impress me. Based on calculations we have done at the Economic Strategy Institute, perhaps a third of the causality goes in the other direction. That is a big number. If you take a third of our overall trade deficit as being structural, rather than a saving or macroeconomic phenomenon, you are at approximately $50 billion a year. And, quite frankly, I believe that a third is a very conservative estimate.

Twenty or 25 years ago, the dollar was trading at 360 yen. Ten years ago, it was 250. It recently hit 80. The weak dollar is not a recent phenomenon. This is a secular trend, and the reasons are obvious. If there is a regular $60 billion trade imbalance between two countries, the one with the trade surplus is likely to experience an appreciation of its currency, and the country with the deficit will find its currency falling in value. And now the Japanese are far less willing to recycle the dollars they are earning from their exports into dollar-based assets because of the huge losses they incurred during the 1980s in U.S. real estate—in fact, in anything they invested in the United States. Some of the losses were asset price losses, but probably the bigger portion was the result of currency losses.

I believe that the Japanese have caught on. As long as their markets are closed and they run this big trade surplus, their currency is going to keep appreciating. Japanese investors have now realized that dollar-based assets are not the best investment under these conditions. This just accelerates the appreciation of the yen, and, in fact, if it had not been for massive Bank of Japan intervention in the last four to five months (buying up a lot of the dollars sold by Japanese exporters, banks, and others), the exchange rate would probably be in the sixties by now.

This is a clear sign of the structural nature of the trade deficit. Do you remember hearing that when the exchange rate was at 200 yen to the dollar, that at 180 we will get rid of this trade imbalance? Of course, when 180 came, it became 160 and then it became 140. We were chasing ourselves down. The ineffectiveness of exchange rates to solve the problem is a clear sign of a structural trade imbalance caused largely by closed markets in Japan.

Anyone who has tried to sell into Japan is familiar with the cultural and structural barriers that essentially keep that market closed, making it very difficult to export into that market. And, closed markets allow the Japanese to charge

high prices in their market, generating huge profits that are frequently used to subsidize their exports. So it shows up on both sides of the equation—lower than warranted exports to Japan and, to some extent, higher imports from Japan because of the subsidies on their exports, which they finance, of course, with the high profits earned in their own market.

Every study that has been done shows that Japan under-imports by a substantial amount relative to other industrial countries—at least $100 billion a year, probably a third which would come from the United States if their markets were truly open. That is the structural element of the trade imbalance between these two countries.

Importantly, it is no longer just Japan. We are now running a $30 billion trade deficit with China. Six years ago, our trade imbalance with China was $3 billion. China has grown at 10 percent a year in real terms during this period. We have grown 2 percent a year. If this was purely a macroeconomic problem, how do you explain our trade deficit going from $3 billion to over $30 billion over this six-year period?

The trade deficit is becoming a structural problem with most of East Asia and, in fact, almost two-thirds of our trade imbalance is now with East Asia, a large fraction of which is structural in nature.

Also, the Japanese run trade surpluses with almost everyone, high-saving countries, low-saving countries, high-budget-deficit countries, low-budget-deficit countries, etc. There are possibly one or two exceptions. Australia is one exception because it exports the raw materials that Japan does not produce.

So clearly, the argument that this is purely a macroeconomic problem does not square with the evidence.

To return to the dollar for a moment, not only is its depreciation not correcting the problem, but even if it did, this is not the ideal way to eliminate the trade deficit. A weaker and weaker dollar has undesirable side effects. It creates upward pressure on inflation and interest rates, squeezes purchasing power, makes us poorer, makes our assets cheaper for foreign acquisition, makes it more expensive for us to invest overseas, which in the long run makes it even more difficult to address the trade imbalance. So even if it did work, which, in my judgment it does not, this is not the way you solve what is largely a structural trade imbalance.

There are some economists who will say "So what? Let them keep their markets closed. It is their consumers that suffer. We should keep our markets open anyway," they claim. I consider myself a free trader, but I know the difference between one-way, unconditional, unilateral free trade and the two-way free trade that represents a win-win for all countries, and consumers in all countries.

One-way free trade of the type that we have had for the last five or ten years can be just as destructive, in my opinion, as widespread protectionism. Look at the performance of the U.S. economy over the last 15 years. Average economic growth has been a percentage point lower than it was earlier. Average unemploy-

ment has been a percentage point higher. Real earnings have stagnated over this period. Productivity growth has slowed. Not all of this is the result of trade, trade may not even be the dominant factor, but it is hard to make the case that our unbalanced trade accounts have not made a contribution to this less-favorable economic performance in the United States.

By default, temporary security credentials for an IAM user are valid for a maximum of 12 hours. But you can request a duration as short as 15 minutes or as long as 36 hours using the
DurationSeconds
parameter. For security reasons, a token for an AWS account root user is restricted to a duration of one hour.

GetSessionToken
returns temporary security credentials consisting of a security token, an access key ID, and a secret access key. The following example shows a sample request and response using
GetSessionToken
. The response also includes the expiration time of the temporary security credentials.

Optionally, the
GetSessionToken
request can include
SerialNumber
and
TokenCode
values for AWS multi-factor authentication (MFA) verification. If the provided values are valid, AWS STS provides temporary security credentials that include the state of MFA authentication. The temporary security credentials can then be used to access the MFA-protected API operations or AWS websites for as long as the MFA authentication is valid.

The following example shows a
GetSessionToken
request that includes an MFA verification code and device serial number.

Note

The call to AWS STS can be to the global endpoint or to any of the regional endpoints for which you activate your AWS account. For more information, see the
AWS STS section of
.

Also, note that the parameter in the preceding example is meant as a placeholder for the authentication information—that is, the —that you must include with AWS HTTP API requests. We recommend using the
AWS SDKs
to create API requests, and one benefit of doing so is that the SDKs handle request signing for you. If you must create and sign API requests manually, go to
Signing AWS Requests By Using Signature Version 4
in the to learn how to sign a request.

The following table compares features of the API operations in AWS STS that return temporary security credentials. To learn about the different methods you can use to request temporary security credentials by assuming a role, see
Using IAM Roles
.

¹
MFA support
. You can include information about a multi-factor authentication (MFA) device when you call the AssumeRole and GetSessionToken API operations. This ensures that the temporary security credentials that result from the API call can be used only by users who are authenticated with an MFA device. For more information, see
Configuring MFA-Protected API Access
.

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The Crick Auto Group was founded in 1995 and today comprises 12 dealerships representing 27 new car brands. Our dealerships are located in Tweed Heads, Rockhampton, South Brisbane and 8 sites on the Sunshine Coast in Queensland.

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